0001564590-15-010357.txt : 20151111 0001564590-15-010357.hdr.sgml : 20151111 20151110163823 ACCESSION NUMBER: 0001564590-15-010357 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20150930 FILED AS OF DATE: 20151110 DATE AS OF CHANGE: 20151110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: aTYR PHARMA INC CENTRAL INDEX KEY: 0001339970 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 203435077 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37378 FILM NUMBER: 151219408 BUSINESS ADDRESS: STREET 1: 3545 JOHN HOPKINS COURT, STE #250 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 858-731-8389 MAIL ADDRESS: STREET 1: 3545 JOHN HOPKINS COURT, STE #250 CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 life-10q_20150930.htm 10-Q life-10q_20150930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

o

TRANSITION REPORT UNDER SECTION 13 OF 15(d) OR THE EXCHANGE ACT OF 1934

From the transition period from                 to                .

Commission File Number 001-37378

 

ATYR PHARMA, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-3435077

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

 

 

 

3545 John Hopkins Court, Suite #250, San Diego, CA

 

92121

(Address of principal executive offices)

 

(Zip Code)

(858) 731-8389

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

¨

  

Accelerated filer

¨

 

 

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 6, 2015, there were 23,648,404 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 


 

ATYR PHARMA, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

3

Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

 

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)

 

4

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014

 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)

 

6

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

21

Item 4. Controls and Procedures

 

22

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

22

Item 1A. Risk Factors

 

23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

55

Item 3. Defaults Upon Senior Securities

 

56

Item 4. Mine Safety Disclosures

 

56

Item 5. Other Information

 

56

Item 6. Exhibits

 

56

SIGNATURES

 

57

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

aTyr Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,053

 

 

$

13,899

 

Short-term investments

 

 

48,750

 

 

 

1,954

 

Prepaid expenses and other assets

 

 

2,578

 

 

 

656

 

Total current assets

 

 

111,381

 

 

 

16,509

 

Long-term investments

 

 

28,010

 

 

 

 

Property and equipment, net

 

 

1,841

 

 

 

1,925

 

Other assets

 

 

137

 

 

 

2,210

 

Total assets

 

$

141,369

 

 

$

20,644

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity

   (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,590

 

 

$

1,433

 

Accrued expenses

 

 

3,569

 

 

 

2,932

 

Current portion of deferred rent

 

 

310

 

 

 

295

 

Current portion of commercial bank debt

 

 

3,307

 

 

 

3,134

 

Convertible promissory note

 

 

 

 

 

2,000

 

Preferred stock warrant liabilities

 

 

 

 

 

319

 

Total current liabilities

 

 

8,776

 

 

 

10,113

 

Deferred rent, net of current portion

 

 

211

 

 

 

445

 

Commercial bank debt, net of current portion

 

 

2,640

 

 

 

5,142

 

Other long-term liabilities

 

 

585

 

 

 

335

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock, $0.001 par value; authorized shares – 7,285,456

   at September 30, 2015 and 75,772,871 at December 31, 2014; issued and outstanding

   shares – none at September 30, 2015 and 73,487,415 at December 31, 2014; liquidation

   preference of $0 at September 30, 2015 and $95,619 at December 31, 2014

 

 

 

 

 

95,619

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; authorized shares – 150,000,000 at September 30, 2015

   and 95,500,000 at December 31, 2014; issued and outstanding shares – 23,639,280 at

   September 30, 2015 and 909,880 at December 31, 2014

 

 

24

 

 

 

1

 

Additional paid-in capital

 

 

270,832

 

 

 

19,209

 

Stockholder note receivable

 

 

 

 

 

(69

)

Accumulated other comprehensive loss

 

 

(68

)

 

 

 

Accumulated deficit

 

 

(141,631

)

 

 

(110,151

)

Total stockholders’ equity (deficit)

 

 

129,157

 

 

 

(91,010

)

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)

 

$

141,369

 

 

$

20,644

 

 

See accompanying notes.

 

 

 

3


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(unaudited)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

7,739

 

 

$

4,410

 

 

$

21,834

 

 

$

12,436

 

General and administrative

 

 

3,574

 

 

 

1,821

 

 

 

9,299

 

 

 

5,088

 

Total operating expenses

 

 

11,313

 

 

 

6,231

 

 

 

31,133

 

 

 

17,524

 

Loss from operations

 

 

(11,313

)

 

 

(6,231

)

 

 

(31,133

)

 

 

(17,524

)

Other income (expense), net

 

 

(16

)

 

 

(400

)

 

 

(347

)

 

 

(788

)

Net loss

 

 

(11,329

)

 

 

(6,631

)

 

 

(31,480

)

 

 

(18,312

)

Accretion to redemption value of redeemable convertible

   preferred stock

 

 

 

 

 

(139

)

 

 

(15

)

 

 

(416

)

Net loss attributable to common stockholders

 

$

(11,329

)

 

$

(6,770

)

 

$

(31,495

)

 

$

(18,728

)

Net loss per share attributable to common stockholders, basic

   and diluted

 

$

(0.48

)

 

$

(8.02

)

 

$

(2.38

)

 

$

(22.73

)

Weighted average common stock shares outstanding, basic

   and diluted

 

 

23,581,001

 

 

 

843,817

 

 

 

13,221,551

 

 

 

824,062

 

 

See accompanying notes.

 

 

 

4


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(unaudited)

 

Net loss

 

$

(11,329

)

 

$

(6,631

)

 

$

(31,480

)

 

$

(18,312

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized gain (loss) on available-for-sale investments

 

 

38

 

 

 

 

 

 

(68

)

 

 

 

Comprehensive loss

 

$

(11,291

)

 

$

(6,631

)

 

$

(31,548

)

 

$

(18,312

)

 

See accompanying notes.

 

 

 

5


 

aTyr Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(31,480

)

 

$

(18,312

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

643

 

 

 

620

 

Issuance of common stock for technology

 

 

1,411

 

 

 

 

Stock-based compensation

 

 

2,469

 

 

 

785

 

Amortization of debt discount

 

 

238

 

 

 

295

 

Change in fair value of preferred stock warrant liability

 

 

(29

)

 

 

213

 

Amortization of investment premium

 

 

479

 

 

 

29

 

Deferred rent

 

 

(219

)

 

 

(206

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,192

)

 

 

(348

)

Accounts payable and accrued expenses

 

 

718

 

 

 

(99

)

Net cash used in operating activities

 

 

(26,962

)

 

 

(17,023

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(545

)

 

 

(249

)

Purchases of investment securities

 

 

(99,408

)

 

 

(5,397

)

Maturities of investment securities

 

 

24,055

 

 

 

650

 

Net cash used in investing activities

 

 

(75,898

)

 

 

(4,996

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Issuance of preferred stock for cash, net of issuance costs

 

 

75,648

 

 

 

 

Issuance of common stock through initial public offering, net of offering costs

 

 

77,246

 

 

 

 

Proceeds from issuance of common stock through option exercises

 

 

533

 

 

 

72

 

Proceeds from notes payable to bank

 

 

 

 

 

5,000

 

Repayments on notes payable to bank

 

 

(2,413

)

 

 

(775

)

Repayment of convertible debt

 

 

(2,000

)

 

 

 

Net cash provided by financing activities

 

 

149,014

 

 

 

4,297

 

Net change in cash and cash equivalents

 

 

46,154

 

 

 

(17,722

)

Cash and cash equivalents at beginning of the period

 

 

13,899

 

 

 

36,457

 

Cash and cash equivalents at end of the period

 

$

60,053

 

 

$

18,735

 

 

See accompanying notes.

 

 

 

6


 

aTyr Pharma, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Organization, Business, Basis of Presentation and Summary of Significant Accounting Policies

Organization and Business

aTyr Pharma, Inc. (the Company) was incorporated in the state of Delaware on September 8, 2005. The Company is focused on the discovery and clinical development of innovative medicines for patients suffering from severe rare diseases.

Initial Public Offering

On May 12, 2015, the Company completed its initial public offering (IPO) of 6,164,000 shares of common stock at $14.00 per share, resulting in gross proceeds of approximately $86.3 million and net proceeds of $75.9 million, after underwriting and other expenses of approximately $10.4 million (consisting of approximately $6.0 million in underwriting discounts and commissions and approximately $4.4 million in other offering expenses). In connection with the IPO, all outstanding shares of redeemable convertible preferred stock were converted into 16,279,859 shares of the Company’s common stock and warrants to purchase 206,581 shares of redeemable convertible preferred stock were converted into warrants to purchase 25,970 shares of the Company’s common stock with a resultant reclassification of the warrant liabilities to additional paid-in capital. In addition, the Company filed an amended and restated certificate of incorporation on May 12, 2015, authorizing 150,000,000 shares of common stock and 7,285,456 shares of preferred stock, 5,000,000 of which is undesignated preferred stock.

Upon the closing of the IPO, 1,574,566 shares of common stock were reserved for future issuance under the 2015 Stock Option and Incentive Plan (the 2015 Plan) and 227,623 shares of common stock were reserved for future issuance under the 2015 Employee Stock Purchase Plan (the 2015 ESPP).

Principles of Consolidation

The consolidated financial statements include the accounts of aTyr Pharma, Inc., its 98% majority-owned subsidiary in Hong Kong, Pangu BioPharma Limited (Pangu BioPharma), and six variable interest entities (Affiliates), in which aTyr Pharma, Inc. was considered to be the primary beneficiary. The Affiliates were dissolved in the fourth quarter of 2014 and the Company continued the operating activities of the Affiliates. All intercompany transactions and balances are eliminated in consolidation.

Reverse Stock Split

On May 5, 2015, the Company filed an amendment to its amended and restated certificate of incorporation to effect a one-for-7.95413 reverse stock split of the Company’s common stock (the Reverse Stock Split). The par value and the authorized shares of the common and convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock and the conversion ratio of the redeemable convertible preferred stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) and following the requirements of the United States Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position and its results of operations and its cash flows for periods presented. These statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2014, contained in the Company’s final prospectus dated May 6, 2015 filed by the Company with the SEC on May 7, 2015 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the Securities Act), in connection with the Company’s IPO. The results of the interim periods are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.

 

7


 

Use of Estimates

The Company’s consolidated financial statements are prepared in accordance with GAAP. The preparation of the Company’s consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. The most significant estimates in the Company’s consolidated financial statements relate to the fair value of equity issuances and awards, and clinical trials and research and development expense accruals. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately differ materially from these estimates and assumptions.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents and adjusted for the weighted average number of common shares outstanding that are subject to repurchase. The Company has excluded 58,280 and 65,782 shares subject to repurchase from the weighted average number of common shares outstanding for the three months ended September 30, 2015 and 2014, respectively. The Company has excluded 65,351 and 66,830 shares subject to repurchase from the weighted average number of common shares outstanding for the nine months ended September 30, 2015 and 2014, respectively. Diluted net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common stock equivalents outstanding for the period determined using the treasury-stock method. Dilutive common stock equivalents are comprised of redeemable convertible preferred stock, redeemable convertible preferred stock issuable upon conversion of convertible promissory note, warrants for the purchase of redeemable convertible preferred stock, warrants for common stock and options outstanding under the Company’s stock option plan. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common share equivalents):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Redeemable convertible preferred stock outstanding

 

 

 

 

 

9,238,868

 

 

 

 

 

 

9,238,868

 

Redeemable convertible preferred stock issuable upon

   conversion of convertible promissory note

 

 

 

 

 

94,455

 

 

 

 

 

 

94,455

 

Warrants for redeemable convertible preferred stock

 

 

 

 

 

25,970

 

 

 

 

 

 

25,970

 

Warrants for common stock

 

 

25,970

 

 

 

 

 

 

25,970

 

 

 

 

Common stock options

 

 

1,483,279

 

 

 

1,342,570

 

 

 

1,483,279

 

 

 

1,342,570

 

 

 

 

1,509,249

 

 

 

10,701,863

 

 

 

1,509,249

 

 

 

10,701,863

 

 

 

 

8


 

2. Fair Value Measurements

The carrying amounts of cash equivalents, prepaid and other assets, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, which is considered a Level 2 input, the Company believes that the fair value of its commercial bank debt and convertible promissory notes approximate their carrying values. Investment securities and preferred stock warrant liabilities are recorded at fair value.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets.

Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial assets measured at fair value on a recurring basis consist of investment securities. Investment securities are recorded at fair value, defined as the exit price in the principal market in which the Company would transact, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Level 2 securities are valued using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques and include the Company’s investments in corporate debt securities and commercial paper. Financial liabilities measured at fair value on a recurring basis include the Company’s preferred stock warrant liabilities. None of the Company’s non-financial assets and liabilities is recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

As of September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,053

 

 

$

60,053

 

 

$

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Paper

 

 

2,992

 

 

 

 

 

 

2,992

 

 

 

 

Corporate debt securities

 

 

45,758

 

 

 

 

 

 

45,758

 

 

 

 

Sub-total short-term investments

 

 

48,750

 

 

 

 

 

 

48,750

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

11,860

 

 

 

 

 

 

11,860

 

 

 

 

Corporate debt securities

 

 

16,150

 

 

 

 

 

 

16,150

 

 

 

 

Sub-total long-term investments

 

 

28,010

 

 

 

 

 

 

28,010

 

 

 

 

Total assets measured at fair value

 

$

136,813

 

 

$

60,053

 

 

$

76,760

 

 

$

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,899

 

 

$

13,899

 

 

$

 

 

$

 

Short-term investments - Corporate debt securities

 

 

1,954

 

 

 

 

 

 

1,954

 

 

 

 

Total assets measured at fair value

 

$

15,853

 

 

$

13,899

 

 

$

1,954

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrant liabilities

 

$

319

 

 

$

 

 

$

 

 

$

319

 

 

 

9


 

At September 30, 2015 and December 31, 2014 available-for-sale investments are detailed as follows (in thousands):

 

 

 

September 30, 2015

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

2,992

 

 

$

 

 

$

 

 

$

2,992

 

Corporate debt securities

 

 

45,796

 

 

 

5

 

 

 

(43

)

 

 

45,758

 

 

 

$

48,788

 

 

$

5

 

 

$

(43

)

 

$

48,750

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

11,853

 

 

$

8

 

 

$

(1

)

 

$

11,860

 

Corporate debt securities

 

 

16,187

 

 

 

4

 

 

 

(41

)

 

 

16,150

 

 

 

$

28,040

 

 

$

12

 

 

$

(42

)

 

$

28,010

 

 

 

 

December 31, 2014

 

 

 

Gross

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Market Value

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

1,954

 

 

$

 

 

$

 

 

$

1,954

 

 

Available-for-sale investments that are in an unrealized loss position at September 30, 2015 are as follows (in thousands):

 

 

 

Estimated Fair

Value

 

 

Gross Unrealized

Losses

 

Asset-backed securities

 

$

7,842

 

 

$

(1

)

Corporate debt securities

 

 

45,738

 

 

 

(84

)

 

 

$

53,580

 

 

$

(85

)

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015, all available-for-sale investments have contractual maturity dates within two years. As of September 30, 2015, there are 32 available-for-sale investments in gross unrealized loss position, all of which had been in such position for less than twelve months.

At each reporting date, the Company performs an evaluation of impairment to determine if the unrealized losses are other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, and the Company’s intent and ability to hold the investment until recovery of its amortized cost basis. The Company intends, and has the ability, to hold its investments in unrealized loss positions until their amortized cost basis has been recovered. Based on its evaluation, the Company determined that its unrealized losses were not other-than-temporary at September 30, 2015.

All warrant liabilities are recorded at fair value utilizing the Black-Scholes option pricing model using significant unobservable inputs consistent with the inputs used for the Company’s stock-based compensation expense adjusted for the warrants’ expected life.

The following table provides a reconciliation of all liabilities measured at fair value using Level 3 significant unobservable inputs (in thousands):

 

 

 

Warrant

Liabilities

 

Balance at December 31, 2014

 

$

319

 

Change in fair value

 

 

(29

)

Balance at May 5, 2015

 

$

290

 

Reclassification to additional paid-in capital as of IPO on

   May 6, 2015

 

 

(290

)

Balance at September 30, 2015

 

$

 

 

 

 

10


 

3. Debt, Commitments and Contingencies

Commercial Bank Debt

Commercial bank debt and unamortized discount balances are as follows (in thousands):

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Commercial bank debt

 

$

6,028

 

 

$

8,439

 

Less debt discount, net of current portion

 

 

(15

)

 

 

(60

)

Commercial bank debt, net of debt discount

 

 

6,013

 

 

 

8,379

 

Less current portion of commercial bank debt

 

 

(3,373

)

 

 

(3,237

)

Commercial bank debt, net of current portion

 

$

2,640

 

 

$

5,142

 

Current portion of commercial bank debt

 

$

3,373

 

 

$

3,237

 

Current portion of debt discount

 

 

(66

)

 

 

(103

)

Current portion of commercial bank debt

 

$

3,307

 

 

$

3,134

 

 

Future minimum principal and interest payments under the Company’s loan and security agreement with Silicon Valley Bank, including the final payment, are as follows (in thousands):

 

 

 

As of

September 30, 2015

 

2015

 

$

905

 

2016

 

 

3,622

 

2017

 

 

2,310

 

 

 

 

6,837

 

Less interest and final payment

 

 

(809

)

Commercial bank debt

 

$

6,028

 

 

Facility Lease

In December 2011, the Company entered into a noncancelable operating lease that included certain tenant improvement allowances and is subject to base lease payments, which escalate over the term of the lease, additional charges for common area maintenance and other costs. The lease expires in May 2017 and the Company has an option to extend the lease for a period of five years. Rent expense for the three months ended September 30, 2015 and 2014 was $0.1 million. Rent expense for the nine months ended September 30, 2015 and 2014 was $0.3 million and $0.1 million, respectively.

In conjunction with this lease, the Company borrowed $2.0 million under a subordinated unsecured convertible promissory note issued to the venture arm of its landlord. The convertible promissory note carried an annual interest rate of 8.0% and matured at the earlier of (i) May 2015, (ii) a liquidation event, or (iii) the closing of an initial firm commitment underwritten public offering of the Company’s common stock pursuant to a registration statement under the Act, at which time all outstanding principal and accrued interest amounts would be due, unless previously converted. In May 2015, the $2.0 million outstanding principal balance of the convertible promissory note and the $0.5 million accrued interest on the convertible promissory note was repaid in full in connection with the Company’s IPO.

Future minimum payments under the non-cancelable operating lease as of September 30, 2015 were as follows (in thousands):

 

 

 

Operating

Lease

 

2015

 

$

149

 

2016

 

 

610

 

2017

 

 

231

 

 

 

$

990

 

 

 

11


 

Research Agreements and Funding Obligations

In October 2007, the Company entered into a research funding and option agreement for certain technologies from The Scripps Research Institute (TSRI). Under the agreement, the Company provides funding to TSRI to conduct certain research activities. The agreement renews automatically for successive 12 month periods starting on May 31st of each year unless the Company provides 30 days’ prior written notice to terminate the agreement. TSRI has the right to terminate the agreement if the Company fails to make any payment under the agreement or for breach or insolvency. Under the research funding and option agreement, TSRI has granted the Company options to enter into license agreements to acquire rights and exclusive licenses to develop, make, have made, use, have used, import, have imported, offer to sell, sell, and have sold certain licensed products, processes and services based on certain technology arising from the sponsored research activities. Pursuant to the terms of these license agreements, TSRI is entitled to receive tiered royalties as a percentage of net sales and a percentage of nonroyalty revenue the Company may receive from its sublicensees or partners, with the amount owed decreasing if it enters into the applicable sublicense or partnering agreement after meeting a specified clinical milestone. In addition, the Company is obligated to pay TSRI up to an aggregate of $2.75 million under each license agreement upon the achievement of specific clinical and regulatory milestone events. In January 2015, the Company and TSRI entered into an amended and restated research funding and option agreement pursuant to which the Company agreed to issue 119,840 shares of its common stock to TSRI in consideration for the adjustment of sublicense payments and the assignment of certain intellectual property rights by TSRI to the Company. The $1.4 million fair value of the common stock issued to TSRI was recorded to research and development expense. The Company issued the shares of common stock to TSRI on March 31, 2015.

During the three months ended September 30, 2015 and 2014, excluding the fair value of the common stock issued to TSRI described above, the Company recognized expense under the agreement in the amount of $0.2 million. During the nine months ended September 30, 2015 and 2014, excluding the fair value of the common stock issued to TSRI described above, the Company recognized expense under the agreement in the amount of $0.5 million. A member of the Company’s board of directors is a faculty member at TSRI and such payments fund a portion of his research activities conducted at TSRI.

During the three months ended September 30, 2015 and 2014, the Company provided charitable donations to the National Foundation for Cancer Research of $0.1 million. During the nine months ended September 30, 2015 and 2014, the Company provided charitable donations to the National Foundation for Cancer Research of $0.3 million. The Company has requested that the donations be restricted to certain basic research in cancer biology and therapeutics, a portion of which funds research activities conducted at TSRI in the laboratory of a member of the Company’s board of directors.

FUJIFILM Diosynth Biotechnologies U.S.A., Inc. Agreement

On June 16, 2015, the Company entered into a Master Services Agreement (the MSA) with FUJIFILM Diosynth Biotechnologies U.S.A., Inc. (Fujifilm) to complete the development of the manufacturing process and for the production of the active pharmaceutical ingredient for Resolaris. Pursuant to the MSA, Fujifilm will provide the active ingredient for Resolaris to support future clinical trials, including potential pivotal trials. Under the initial scope of work executed pursuant to the MSA, Fujifilm will conduct process optimization, scale-up and demonstration, and cGMP manufacturing of the active pharmaceutical ingredient of Resolaris, and the Company is required to pay Fujifilm based on development and production milestones up to the total payment in the mid seven figures. During the three and nine months ended September 30, 2015, expenses associated with this agreement were $0.8 million and $0.9 million, respectively.

    

 

4. Stockholders’ Equity

Stock Option and Incentive Plans

The 2015 Plan became effective upon the effectiveness of the registration statement for the IPO in May 2015, and the Company ceased granting stock options under its 2014 Stock Plan (the 2014 Plan) upon the IPO.

Stock option activity is summarized as follows:

 

 

 

Number of Outstanding

Options

 

 

Weighted

Average

Price

 

Balance at December 31, 2014

 

 

1,514,471

 

 

$

4.60

 

Granted

 

 

1,141,626

 

 

$

11.66

 

Exercised

 

 

(166,454

)

 

$

2.87

 

Canceled

 

 

(413,493

)

 

$

6.38

 

Balance at September 30, 2015

 

 

2,076,150

 

 

$

8.29

 

 

12


 

 

The allocation of stock-based compensation for all options and restricted stock awards is as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Research and development

 

$

492

 

 

$

232

 

 

$

1,288

 

 

$

325

 

General and administrative

 

 

558

 

 

 

242

 

 

 

1,181

 

 

 

460

 

 

 

$

1,050

 

 

$

474

 

 

$

2,469

 

 

$

785

 

 

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Expected term (in years)

 

5.50 – 6.08

 

 

5.77 – 6.56

 

 

5.77 – 6.08

 

 

5.77 – 6.56

 

Risk-free interest rate

 

1.69% – 1.92

%

 

1.66% – 2.15

%

 

1.47% – 1.92

%

 

1.66% – 2.15

%

Expected volatility

 

79.28% – 81.01

%

 

111.92

%

 

79.28% – 100.9

%

 

111.10% – 111.92

%

Expected dividend yield

 

0.0

%

 

0.0

%

 

0.0

%

 

0.0

%

 

Approval of 2015 Plan

On April 25, 2015, the Company’s board of directors adopted, and the Company’s stockholders approved, the 2015 Plan. The 2015 Plan became effective on May 6, 2015. A total of 1,574,566 shares of the Company’s common stock were initially reserved for issuance under the 2015 Plan. In addition, the number of shares reserved and available for issuance under the 2015 Plan will automatically increase each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by the lesser of (i) 1,840,000 shares, (ii) 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or (iii) an amount determined by the Company’s board of directors. Shares underlying any awards under the 2015 Plan and any awards granted under the 2014 Plan prior to the Company’s IPO that are forfeited, canceled, reacquired by us prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan.

Approval of the Employee Stock Purchase Plan

On April 25, 2015, the Company’s board of directors adopted, and the Company’s stockholders approved, the Company’s 2015 Employee Stock Purchase Plan (the 2015 ESPP). The 2015 ESPP became effective on May 6, 2015. A total of 227,623 shares of the Company’s common stock were initially reserved for issuance under the 2015 ESPP. In addition, the number of shares reserved and available for purchase under the 2015 ESPP will automatically increase each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by 1% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31 or such lesser number of shares as determined by the administrator of the 2015 ESPP.

Sale of Series E Redeemable Convertible Preferred Stock

On March 31, 2015, pursuant to a Series E stock purchase agreement, the Company issued an aggregate of 68,166,894 shares of its Series E redeemable convertible preferred stock at a purchase price of $1.119 per share, for aggregate cash consideration of $76.3 million and incurred $0.6 million of issuance costs. Each share of Series E redeemable convertible preferred stock was convertible into 0.12572 shares of the Company’s common stock. The purchase agreement also included an automatic conversion into approximately 0.10329 shares of common stock for each share of Series E redeemable convertible preferred stock upon completion of a qualified public offering on or before March 1, 2016. A qualified public offering must have resulted in listing on a U.S. national securities exchange and at least $50.0 million of gross proceeds at a per share price of not less than $13.00. On May 12, 2015, all outstanding shares of the Company’s redeemable convertible preferred stock converted into 7,040,991 shares of the Company’s common stock in connection with the Company’s IPO.

 

13


 

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance is as follows:

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Conversion of redeemable convertible preferred stock

 

 

 

 

 

9,238,868

 

Conversion of redeemable convertible preferred stock issuable

   upon conversion of promissory note

 

 

 

 

 

94,455

 

Redeemable convertible preferred stock warrants

 

 

 

 

 

25,970

 

Common stock warrants

 

 

25,970

 

 

 

 

Common stock options outstanding

 

 

2,076,150

 

 

 

1,514,471

 

Shares available under the 2015 Plan

 

 

1,483,279

 

 

 

180,190

 

Shares available under the 2015 ESPP Plan

 

 

227,623

 

 

 

 

 

 

 

3,813,022

 

 

 

11,053,954

 

 

 

5. Subsequent Events

In October 2015, the Company granted to its executives and new hires stock options to purchase an aggregate of 297,800 shares of common stock at an exercise price of $10.24 that vest over four years in equal monthly installments.  The Company also granted to its employees and certain consultants performance-based stock options to purchase up to an aggregate 169,402 shares of common stock at an exercise price of $10.24.  Upon achievement of specified performance goals by October 1, 2017, such performance-based options shall begin to vest over four years in equal monthly installments, otherwise the options will be subject to forfeiture.

 

In addition, in October 2015, the Compensation Committee of the Board of Directors approved an amendment to certain outstanding stock options granted to active employees and certain consultants under the 2014 Plan to accelerate the vesting schedule of such options from six-year vesting to four-year vesting retroactive to the original vesting commencement dates of the options. Approximately 931,749 shares were underlying the amended stock options.  

 

 

 

14


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2014 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are contained in our final prospectus dated May 6, 2015, or the Final Prospectus, filed with the Securities and Exchange Commission, or SEC, on May 7, 2015 pursuant to Rule 424(b) under the Securities Act of 1933, as amended or the Securities Act, in connection with our initial public offering, or IPO.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended or the Exchange Act. Such forward looking statements, which represent our intent, belief or current expectations, involve risks and uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. In some cases you can identify forward-looking statements by terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions. Factors that could cause or contribute to differences in results include, but are not limited to those set forth under “Risk Factors” under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q. Except as required by law we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We engage in the discovery and clinical development of innovative medicines for patients suffering from severe, rare diseases using our knowledge of Physiocrine biology, a newly discovered set of physiological modulators. We have discovered approximately 300 Physiocrines, a class of naturally occurring human proteins that we believe promote homeostasis, a fundamental process of restoring stressed or diseased tissue to a healthier state. By leveraging our discovery engine and our knowledge of rare diseases, we aim to build a proprietary pipeline of novel product candidates with the potential to treat severe, rare diseases characterized by immune dysregulation. We plan to independently commercialize our Physiocrine-based therapeutics.

In the first quarter of 2014, we completed a double-blind, placebo-controlled Phase 1 clinical trial of Resolaris, our lead development candidate from our discovery engine, in which we assessed its safety and tolerability in 32 healthy subjects. Resolaris was shown to be well tolerated at all doses tested, and no serious adverse events were reported. Based on the favorable clinical safety, tolerability, pharmacokinetic and immunogenicity profile of Resolaris in this trial, we decided to advance Resolaris into clinical trials of patients affected by rare myopathies with an immune component or RMICs. We are currently conducting a multi-national exploratory Phase 1b/2 clinical trial of Resolaris in the European Union and United States in adult patients with facioscapulohumeral muscular dystrophy, or FSHD, a severe, rare genetic myopathy in which immune cells invade diseased muscle, and for which there are no approved treatments. Subject to our interactions with regulatory authorities and patient enrollment in accordance with our clinical development plans, we expect to report initial results from this clinical trial in the first quarter of 2016.

We recently initiated a Phase 1b/2 clinical trial in patients with limb-girdle muscular dystrophy (LGMD) 2B, a severe generic muscle disease with immune cell invasion in afflicted skeletal muscle for which there are currently no approved treatments. This international Phase 1b/2 clinical trial is an open-label, intra-patient dose escalation study designed to assess the safety, tolerability, immunogenicity and activity of Resolaris in adult patients with LGMD2B.  This new trial includes adult patients with FSHD to further augment our ongoing FSHD trial and to inform subsequent later-stage trial considerations. Both LGMD2B and FSHD are progressive, debilitating muscle diseases characterized by an immune component in the affected skeletal muscles.

We have also recently initiated a Phase 1b/2 clinical trial in patients with early onset FSHD.  This international Phase 1b/2 clinical trial is an open-label, intra-patient dose escalation study designed to assess the safety, tolerability, immunogenicity and activity of Resolaris.  Sites are expected to enroll up to 16 early onset patients who displayed signs or symptoms of the disease prior to 10 years of age.  In the first stage of this trial, up to eight patients between the ages of 16 and 25 will be enrolled.  The second stage of enrollment is expected to include up to eight patients between the ages of 12 and 15 years.

Since our inception in 2005, we have devoted substantially all of our resources to the therapeutic application of Physiocrines, including the preclinical development of and clinical trials for Resolaris, the creation, licensing and protection of related intellectual property and the provision of general and administrative support for these operations. We have not generated any revenue from product sales and, through September 30, 2015, have funded our operations primarily with the aggregate proceeds from the sales of our common stock in our IPO, private placement of redeemable convertible preferred stock and convertible promissory notes, commercial bank debt and a convertible promissory note issued to our landlord.

 

15


 

We have never been profitable and have incurred net losses in each annual and quarterly period since our inception. For the nine months ended September 30, 2015 and 2014, we have incurred consolidated net losses of $31.5 million and $18.3 million, respectively. As of September 30, 2015, we had an accumulated deficit of $141.6 million.

Substantially all of our net losses resulted from costs incurred in connection with our development of and clinical trials for Resolaris, our other research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, at least until we apply for and receive regulatory approval for Resolaris or another product candidate and generate substantial revenues from its commercialization, if ever. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the nature and extent of our research and development expenses and clinical trials. We expect our expenses will increase substantially in connection with our ongoing activities as we:

 

conduct clinical trials of Resolaris and any additional product candidates we may develop;

 

continue our research and product development efforts;

 

manufacture preclinical study and clinical trial materials;

 

expand, protect and maintain our intellectual property portfolio;

 

seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

hire additional staff, including clinical, operational, financial and technical personnel to execute on our business plan and create additional infrastructure to support our operations as a public company; and

 

implement operational, financial and management systems.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years at a minimum. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to raise substantial additional capital beyond the net proceeds from our IPO. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our preclinical and clinical development efforts and the timing and nature of the regulatory approval process for our product candidates. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and ability to develop our product candidates.

In May 2015, we completed our IPO whereby we sold 6,164,000 shares of common stock at a public offering price of $14.00 per share. As a result of the IPO, we raised a total of $75.9 million in net proceeds after deducting underwriting discounts and commissions of approximately $6.0 million and offering expenses of approximately $4.4 million. In addition, in connection with the IPO, all outstanding convertible preferred stock converted into 16,279,859 shares of our common stock.

Financial Operations Overview

Organization and Business; Principles of Consolidation and Affiliates

We conduct substantially all of our activities through aTyr Pharma, Inc., a Delaware corporation, at our facility in San Diego, California. aTyr Pharma, Inc. was incorporated in the state of Delaware in September 2005. The consolidated financial statements include the accounts of aTyr Pharma, Inc., its 98% majority-owned subsidiary in Hong Kong, Pangu BioPharma Limited, and six variable interest entities, which we refer to as the Affiliates.

 

16


 

In October and November 2011, we established the Affiliates to perform research and development for specified programs. In April 2012, we purchased preferred and common stock of each Affiliate and subsequently issued those shares to each of our stockholders in the form of dividends, in proportion to their relative holdings of aTyr Pharma, Inc. in order to effectuate the spin-out of the Affiliates into stand-alone entities. We entered into nonexclusive license agreements allowing each Affiliate to utilize certain intellectual property owned by us. We also entered into research and development services agreements in our therapeutic program area of interest covered by the respective nonexclusive license agreement with each Affiliate. The working capital of the Affiliates was primarily provided by amounts borrowed from us under convertible promissory note agreements. The Affiliates were not capitalized with sufficient equity to finance their operations and were each therefore considered a variable interest entity, or VIE. In May 2012, the Affiliates commenced operations. The Affiliates had no employees and substantially all of their expenses related to the services provided to them by us, and the expenses related to services provided by us have been eliminated in consolidation. The liquidation preferences underlying the preferred stock issued by the Affiliates and the convertible promissory notes issued by the Affiliates to us effectively protected stockholders of the Affiliates from absorbing the losses of the Affiliates and, as a result, no losses were allocated to these noncontrolling interests and such losses are included in our consolidated net loss. None of the related parties to the Affiliates individually had the power and benefits to control the Affiliates. Because we were the related party that was most closely associated with each VIE, we have consolidated the six Affiliates for financial reporting purposes.

In the fourth quarter of 2014, the board of directors and stockholders of each of the Affiliates approved the dissolution of each applicable Affiliate in accordance with the laws of its respective jurisdiction of organization. In connection with the dissolution of the Affiliates, the license and operating agreements by and between aTyr Pharma, Inc. and each Affiliate were terminated. Our consolidated financial statements for periods after the effectiveness of the dissolution of the Affiliates will no longer include a noncontrolling interest, and the operating activities that the Affiliates performed prior to dissolution will be continued by aTyr Pharma, Inc.

Research and Development Expenses

To date, our research and development expenses have related primarily to the development of and clinical trials for Resolaris and to research efforts targeting the potential therapeutic application of other Physiocrine-based immuno-modulators in rare disease indications. These expenses consist primarily of:

 

salaries and employee-related expenses, including stock-based compensation and benefits for personnel in research and product development functions;

 

costs associated with conducting our preclinical, development and regulatory activities, including fees paid to third-party professional consultants, service providers and our scientific, therapeutic and clinical advisory board;

 

costs to acquire, develop and manufacture preclinical study and clinical trial materials;

 

costs incurred under clinical trial agreements with clinical research organizations, or CROs, and investigative sites;

 

costs for laboratory supplies;

 

payments and stock issuances related to licensed products and technologies; and

 

allocated facilities, depreciation and other allocable expenses.

Research and development costs are expensed as incurred. Clinical trial and other development costs incurred by third parties are expensed as the contracted work is performed. We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from our external service providers. We adjust our accrual as actual costs become known.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that the levels of our research and development expenses will increase during the foreseeable future as we: (i) continue to advance Resolaris in clinical development; (ii) advance our iMod.Fc discovery program; and (iii) engage in additional research, discovery and development activities relating to our discovery engine for therapeutic applications of Physiocrines.

 

17


 

We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinical development and given the early stage of our programs, we are unable to estimate with any certainty the costs we will incur or the timelines we will require in the continued development of Resolaris and any other product candidates that we may develop. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, finance and administration, corporate development and administrative support functions, including stock-based compensation expenses and benefits. Other significant general and administrative expenses include accounting and legal services, expenses associated with applying for and maintaining patents, the cost of various consultants, occupancy costs, information systems costs and depreciation.

We anticipate that our general and administrative expenses will substantially increase for the foreseeable future as we increase our headcount to support the continued development of our product candidates and the increased costs of operating as a public company, including expenses related to services associated with maintaining compliance with NASDAQ listing rules and the SEC requirements, insurance and investor relations costs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses.

Other Income (Expense)

Other income (expense) primarily consists of interest income and expense and changes in the fair value of preferred stock warrant liabilities related to warrants we issued in connection with commercial bank debt. No further fair value adjustments for these warrants will be recorded subsequent to our IPO, when these liabilities were reclassified to additional paid-in capital.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported expenses during the reporting periods. We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity within Note 2 to our audited consolidated financial statements in our Final Prospectus. There have been no material changes to our critical accounting policies and estimates as disclosed in our Final Prospectus.

Results of Operations

Comparison of the Three Months Ended September 30, 2015 and 2014

The following table summarizes our results of operations for the three months ended September 30, 2015 and 2014 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Increase /

 

 

 

2015

 

 

2014

 

 

(Decrease)

 

Research and development expenses

 

$

7,739

 

 

$

4,410

 

 

$

3,329

 

General and administrative expenses

 

 

3,574

 

 

 

1,821

 

 

 

1,753

 

Other income (expense)

 

 

(16

)

 

 

(400

)

 

 

(384

)

 

18


 

 

Research and development expenses. Research and development expenses were $7.7 million and $4.4 million for the three months ended September, 2015 and 2014, respectively. The increase of $3.3 million was due primarily to a $2.3 million increase related to manufacturing costs and clinical development incurred in support of various activities for Resolaris and a $0.8 million increase related to compensation expenses (including $0.3 million of non-cash stock-based compensation) as a result of increased headcount across our research and development organization.

General and administrative expenses. General and administrative expenses were $3.6 million and $1.8 million for the three months ended September 30, 2015 and 2014, respectively. The increase of $1.8 million was due primarily to a $0.7 million increase in personnel costs resulting from increased headcount (including $0.3 million of non-cash stock-based compensation), a $0.3 million increase in costs associated with being a public company and a $0.1 million increase related to intellectual property-related projects.

Other income (expense). Other income (expense) was $(16,000) and $(0.4) million for the three months ended September 30, 2015 and 2014, respectively. The decrease of $0.4 million in other expense was primarily a result of a decrease in interest expense related to the $5.0 million we borrowed in June 2014 under a loan agreement with Silicon Valley Bank or SVB. In addition, other expense in the prior year included $0.1 million of expense as a result of the increase in fair value of outstanding preferred stock warrant liabilities. The preferred stock warrants converted into common stock warrants in connection with our IPO and are no longer subject to remeasurement. The decrease was also impacted by an increase in interest income related to short-term and long-term investments.

Comparison of the Nine Months Ended September 30, 2015 and 2014

The following table summarizes our results of operations for the nine months ended September 30, 2015 and 2014 (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

Increase /

 

 

 

2015

 

 

2014

 

 

(Decrease)

 

Research and development expenses

 

$

21,834

 

 

$

12,436

 

 

$

9,398

 

General and administrative expenses

 

 

9,299

 

 

 

5,088

 

 

 

4,211

 

Other income (expense)

 

 

(347

)

 

 

(788

)

 

 

(441

)

 

Research and development expenses. Research and development expenses were $21.8 million and $12.4 million for the nine months ended September 30, 2015 and 2014, respectively. The increase of $9.4 million was due primarily to a $5.2 million increase related to manufacturing costs and clinical development incurred in support of various activities for Resolaris, a $2.5 million increase related to compensation expenses (including $1.0 million of non-cash stock-based compensation) as a result of increased headcount across our research and development organization, and a $1.4 million increase related to the issuance of common stock in connection with the amendment and restatement of our research funding and option agreement with The Scripps Research Institute, or TSRI.

General and administrative expenses. General and administrative expenses were $9.3 million and $5.1 million for the nine months ended September 30, 2015 and 2014, respectively. The increase of $4.2 million was due primarily to a $1.8 million increase in personnel costs resulting from increased headcount (including $0.7 million of non-cash stock-based compensation), a $1.4 million increase in costs associated with being a public company, and a $0.4 million increase related to intellectual property-related projects.

Other income (expense). Other income (expense) was $(0.3) million and $(0.8) million for the nine months ended September 30, 2015 and 2014, respectively. The decrease of $0.4 million in other expense was primarily due to the $0.2 million of expense included in the prior year as a result of the increase in fair value of outstanding preferred stock warrant liabilities. The preferred stock warrants converted into common stock warrants in connection with our IPO and are no longer subject to remeasurement. The decrease was also impacted by an increase in interest income related to short-term and long-term investments.

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations since our inception. As of September 30, 2015, we had an accumulated deficit of $141.6 million and we expect to continue to incur net losses for the foreseeable future. As of September 30, 2015, we had cash, cash equivalents and short-term and long-term investments of $136.8 million. As discussed above, our IPO and related transactions resulted in net proceeds of $75.9 million. We believe that our existing cash and cash equivalents as of September 30, 2015 will be sufficient to meet our anticipated cash requirements through at least the next 12 months.

 

19


 

Sources of Liquidity

From our inception through September 30, 2015, we have funded our operations primarily with aggregate proceeds from the sales of our common stock through our IPO, the private placement of redeemable convertible preferred stock and convertible promissory notes, commercial bank debt and a convertible promissory note issued to our landlord.

Debt Financing

In each of July 2013 and June 2014, we borrowed $5.0 million under a $10.0 million loan and security agreement with SVB, which we refer to as the SVB Loan. Beginning in July 2014, we began to make equal payments of principal and interest which are due through the maturity date of June 1, 2017. The interest rate is a per annum fixed rate of 5.0% and 5.88% for the $5.0 million drawn in each of July 2013 and June 2014, respectively. The final payment due in June 2017 includes an additional fee of $0.5 million. The SVB Loan is collateralized by all of our assets, other than our intellectual property, and contains customary affirmative and negative covenants, reporting requirements and events of default. As of September 30, 2015, we have no available credit under the SVB Loan.

In December 2011, in conjunction with our facility lease, we issued a $2.0 million subordinated convertible unsecured promissory note to the venture arm of our landlord, BioMed Realty, L.P., which was subsequently transferred to its affiliate, BMV Direct RE LP. The convertible note carried an annual interest rate of 8.0% and matured on May 12, 2015, at which time we repaid the outstanding principal and accrued interest on the convertible note of $2.0 million and $0.5 million, respectively.

Cash Flows

The following table sets forth a summary of the net cash flow activity for each of the periods indicated (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Net cash provided by (used in):